Dow Theory: Volume Must Confirm The Trend
AAA
  1. Dow Theory: Introduction
  2. Dow Theory: The Market Discounts Everything
  3. Dow Theory: The Three-Trend Market
  4. Dow Theory: The Three Phases Of Primary Trends
  5. Dow Theory: Market Indexes Must Confirm Each Other
  6. Dow Theory: Volume Must Confirm The Trend
  7. Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
  8. Dow Theory: Dow Theory Specifics
  9. Dow Theory: Current Relevance
  10. Dow Theory: Conclusion

Dow Theory: Volume Must Confirm The Trend

By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

According to Dow theory, the main signals for buying and selling are based on the price movements of the indexes. Volume is also used as a secondary indicator to help confirm what the price movement is suggesting. (For more insight, see Volume Oscillator Confirms Price Movements and Gauging Support And Resistance With Price By Volume.)


From this tenet it follows that volume should increase when the price moves in the direction of the trend and decrease when the price moves in the opposite direction of the trend. For example, in an uptrend, volume should increase when the price rises and fall when the price falls. The reason for this is that the uptrend shows strength when volume increases because traders are more willing to buy an asset in the belief that the upward momentum will continue. Low volume during the corrective periods signals that most traders are not willing to close their positions because they believe the momentum of the primary trend will continue.

Conversely, if volume runs counter to the trend, it is a sign of weakness in the existing trend. For example, if the market is in an uptrend but volume is weak on the up move, it is a signal that buying is starting to dissipate. If buyers start to leave the market or turn into sellers, there is little chance that the market will continue its upward trend. The same is true for increased volume on down days, which is an indication that more and more participants are becoming sellers in the market.

According to Dow theory, once a trend has been confirmed by volume, the majority of money in the market should be moving with the trend and not against it.

Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs

  1. Dow Theory: Introduction
  2. Dow Theory: The Market Discounts Everything
  3. Dow Theory: The Three-Trend Market
  4. Dow Theory: The Three Phases Of Primary Trends
  5. Dow Theory: Market Indexes Must Confirm Each Other
  6. Dow Theory: Volume Must Confirm The Trend
  7. Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
  8. Dow Theory: Dow Theory Specifics
  9. Dow Theory: Current Relevance
  10. Dow Theory: Conclusion
RELATED TERMS
  1. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
  2. Current Liquidity

    The total amount of cash and unaffiliated holdings compared to ...
  3. Developed To Net Premiums Earned

    The ratio of developed premiums to net premiums earned over a ...
  4. Return On Policyholder Surplus

    The ratio of an insurance company’s net income to its policyholder ...
  5. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  6. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  1. What is a common price target when identifying a double bottom?

    Learn how to identify a double bottom stock pattern and where to set a target selling price point to get the most out of ...
  2. What does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal ...
  3. What are the main differences between a double top and a double bottom?

    Identify double tops and double bottoms, and learn what each could mean for the security's current price trend. Discover ...
  4. What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these ...

You May Also Like

Related Tutorials
  1. Trading Strategies

    Basics Of Technical Analysis

  2. Investing Basics

    Industry Handbook

  3. Fundamental Analysis

    Ethical Investing Tutorial

  4. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  5. Fundamental Analysis

    Discounted Cash Flow Analysis

Trading Center